Omicron threatens world economic recovery

The Omicron variant of the COVID-19 is threatening worldwide economic recovery although a repeat of the debacle seen in nearly two years of pandemic is unlikely, according to Fitch Ratings.

Considering this, the international credit watcher said in a research note central banks might not be keen on delaying the normalization of monetary policy settings, the expected timing for which had been advancing over the past few months.

Also, considering that not enough information is available about the severity and transmissibility of the Omicron variant, its assumed effects on economies could not yet be made part of growth forecasts.

“We currently believe that another large, synchronized global downturn, such as that seen in [the first half of 2020], is highly unlikely but the rise in inflation will complicate macroeconomic responses if the new variant takes hold,” Fitch Ratings said.

Economies adapting

The US-based credit ratings firm said that based on experience so far in most large countries, each successive wave of COVID-19 infections has a weaker impact on growth as economies adapt.

Further, Fitch Ratings noted that better scientific understanding of the coronavirus as well as vaccination efforts have lessened the reliance of authorities on methods other than medication—such as full lockdowns that wreak havoc on economies.

“These factors make a repeat of [last year’s first-semester] unprecedented global GDP (gross domestic product) contraction unlikely,” the agency said.

“Nevertheless, the return to prepandemic levels of activity in the most exposed sectors, such as tourism and international travel, will be disrupted, and the shift back to services from goods consumption may also slow,” it added.

Unappealing lockdowns

Also, the increased pressure on policymakers to temper inflation is further undermining the appeal of lockdowns and similar steps that strangle economic activities.

“Hence, we believe central banks could be wary of delaying the normalization of monetary policy settings in response,” Fitch Ratings said.

In a separate research note, Fitch Solutions in its Country Risk and Industry Research observed that while it could not yet be fully explained, the ability of Omicron to spread faster than the Delta variant was a given.

“Omicron is likely to spread rapidly across a range of countries, becoming dominant over [the first half of 2022],” Fitch Solutions said.

“In line with this, cases have been reported in more than a dozen countries as of Nov. 29, including countries in Europe and [the Asia-Pacific region],” it added.

Still, Fitch Solutions said protection from vaccines was unlikely to drop off completely, and that work has already begun on reengineered vaccines which could be available from the second quarter of 2022.

“Furthermore, the effectiveness of new antiviral treatments is unlikely to be severely impacted,” it said.